IFRS 5 provides guidelines for the accounting and presentation of non-current assets or disposal groups classified as held for sale, as well as the reporting of discontinued operations. This standard ensures that companies accurately present these assets and operations in their financial statements, reflecting their temporary status before disposal.
Key Provisions of IFRS 5 📜💼
- Classification of Assets Held for Sale 🏗️📦
- A non-current asset or disposal group is classified as held for sale when its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
- Criteria for Classification:
- The asset must be available for immediate sale in its present condition.
- The sale must be highly probable (expected within 12 months).
- Management must have a committed plan to sell the asset.
- Measurement of Non-Current Assets ⚖️📉
- Once classified as held for sale, the asset is measured at the lower of its carrying amount or fair value less costs to sell.
- Depreciation on such assets ceases.
- Discontinued Operations 🚧📊
- A discontinued operation refers to a component of an entity that has been disposed of or classified as held for sale and represents a separate major line of business or geographical area of operations.
- Financial statements must disclose:
- Results of discontinued operations separately.
- Cash flows and assets/liabilities related to these operations.
- Presentation in Financial Statements 📜📊
- Assets held for sale and their associated liabilities must be presented separately in the balance sheet.
- Discontinued operations are shown separately in the income statement, including revenues, expenses, and profit or loss.
- Changes to Plans for Sale 🔄📈
- If an asset no longer meets the criteria for held for sale, it must be reclassified to non-current assets and measured at the lower of:
- Its original carrying amount (adjusted for depreciation).
- Its recoverable amount at the date of reclassification.
- If an asset no longer meets the criteria for held for sale, it must be reclassified to non-current assets and measured at the lower of:
Accounting Issues Under IFRS 5 ⚠️📉
- Valuation Challenges 📊💭
- Determining the fair value less costs to sell can be subjective, especially for unique assets without an active market.
- Timing of Classification ⏳📆
- Judging when an asset meets the criteria for held for sale requires significant management judgment, which can lead to inconsistencies.
- Reclassification Adjustments 🔄⚙️
- If plans to sell the asset change, reclassifications may involve complex adjustments, including reinstating depreciation for the period the asset was held for sale.
- Transparency in Disclosures 📝🔍
- Companies may face challenges in providing clear disclosures, particularly when presenting discontinued operations and related assets/liabilities.
Examples for IFRS 5 in Practice 📚📊
Example 1: Sale of a Manufacturing Plant 🏭💸
- A company decides to sell a manufacturing facility due to strategic restructuring.
- The facility is classified as held for sale and measured at the lower of its carrying amount (₹50 crore) or fair value less costs to sell (₹45 crore).
- The facility is revalued to ₹45 crore, and the ₹5 crore loss is recognized in the income statement.
Example 2: Discontinuation of Retail Operations 🛍️🚪
- A retailer exits the European market, selling its operations.
- The European division is classified as a discontinued operation, and its revenue, expenses, and profit/loss are presented separately in the income statement.
- Assets related to this division are classified as held for sale and disclosed in the balance sheet.
Example 3: Change in Sale Plans 🔄📦
- A company plans to sell a fleet of delivery trucks but later decides to retain them due to market changes.
- The trucks are reclassified to non-current assets, and depreciation is reinstated for the time they were classified as held for sale.
Example 4: Disposal of a Subsidiary 🏢💼
- A parent company sells a subsidiary engaged in healthcare services.
- The subsidiary is classified as a discontinued operation, and all related liabilities are shown under assets/liabilities held for sale in the financial statements.
Example 5: Valuation in Energy Sector ⚡💡
- An energy company decides to sell an underperforming power plant.
- The asset is classified as held for sale and measured at ₹100 crore, which is its fair value less costs to sell.
- Depreciation stops once the asset is classified, ensuring accurate valuation.
Emojis Recap for Key Points ✨
📜 – IFRS Provisions
⚖️ – Fair Value Measurement
🚧 – Discontinued Operations
🔄 – Reclassification Adjustments
🏗️ – Assets Held for Sale
💡 – Transparency
Conclusion: IFRS 5 ensures accurate presentation of non-current assets held for sale and discontinued operations, providing transparency for stakeholders and facilitating comparability across financial statements. 🌍📊
